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Regulation AB: Cause, Effect and Cure

The implementation of Reg AB adds new—but addressable—complexity to the “selling with servicing retained” alternative.

The Cause
Adopted in 2004 by the Securities Exchange Commission (SEC), Regulation AB went into full effect on Jan. 1, 2006. The
goal—to provide consistency and conformity to the rules and procedures governing the registration, offering and ongoing reporting regarding public offerings of asset-backed securities (ABS).

Prior to Reg AB, there existed a litany of rulings and interpretive findings around ABS disclosure, filing and reporting. Under the new regulation, all parties who participate in transaction servicing functions are required to comply with a set of applicable servicing criteria as defined in the regulation. Additionally, each relevant party must procure an independent accountant to ensure compliance with Reg AB.

In many respects, these requirements are based on the Uniform Single Attestation Program (USAP) developed by the Mortgage Bankers Association. Click Here to view a comparison of Reg AB and USAP standards.

Reg AB also applies to securitizations of foreign and domestic receivables, but not to “synthetic” securities, as was hoped by some.

The Effect
Reg AB includes additional requirements for filings and servicing criteria that were not included in the USAP review (e.g. timeliness and completeness of investor reporting).

Certainly one of the most profound effects of Reg AB will be the required level of detail and prospectus content regarding:

o The disclosure of a transaction’s sponsor
o Servicing policies and the functions of all parties to the transaction
o Expanded disclosure regarding the originator
o A specific account of all fees, credit enhancements or derivatives, which may be used for hedging purposes
o Any affiliation among parties to the transaction

The logical conclusion is that the cost of diligent Reg AB compliance could exceed that of a USAP review. For example, the required number of filings for Reg AB is approximately six times that of a USAP review, and conservative estimates peg the fee for a Reg AB attestation and assertion at four times the average cost of a USAP audit. The issue then becomes the attractiveness of seeking an asset sale and
retaining servicing
for non-conforming loans.

One attractive option would be to contract with a sub-servicing entity to alleviate the financial and administrative obligations of Reg AB compliance. While this is a viable alternative, the originator and servicer of record still must disclose details of the third-party contract, as well as information regarding the sub-servicer. The originator and servicer of record also remain liable for the accuracy of ongoing remittance and reporting.

A Better Cure
It’s obvious that Reg AB serves an important role in non-agency debt securitization. Therefore, working with it ultimately will be far less painful than acting against it. Here are some suggestions for making the transition smoother:

o Have a well-coordinated plan involving internal audit procedures and an independent accounting team. Any amendments to existing policies and procedures, as well as contracts with third parties, should take Reg AB into consideration.

o Assess the all-in costs of diligent compliance with Reg AB and match them to the revenue derived from your servicing portfolio. This not only should factor the simple math of 25 basis points times the unpaid principle balance, but also cross- selling opportunities that exist from owning the member relationship.

o If you choose to contract with a third party for sub-servicing, be sure to perform comprehensive due diligence to guarantee soundness and dependability of your business partner. A poor choice in this area could be catastrophic.

Finally, depend upon trusted sources for direction and assistance. Charlie Mac has developed relationships within the loan-servicing industry, which can provide excellent options for credit union clients.

This sponsored content article is provided to the credit union community for shared insights and knowledge from a recognized solutions provider in the industry. Please note that the views and opinions offered here do not reflect those of Callahan & Associates, and Callahan does not endorse vendors or the solutions they offer.

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